2013 marks a rocky year for bonds, taper could add to the case for unconstrained funds

2013 has been a turbulent year for bond investors. Once rumors emerged in June that the Fed was going to start its taper program then, market participants got a glimpse into what fixed income investing might look like as rates rise - and it wasn't pretty. Six months later, when the Fed actually did announce that it would begin tapering while leaving rates low, market reactions were tempered. Still, investors that didn't take the hint in June will now have to plan for what happens with less stimulus. So far, it looks like investors have decided that in this new reality unconstrained bond funds are the way to go.

According to a recent Wall Street Journal article, inflows into unconstrained bond funds are up 30% over 2012, which is a notable shift. However, when you look under the hood of these funds, what each firm considers 'unconstrained' can vary widely. For some it means having a bigger cash position, for others the diversification in them is still highly correlated to indexes. Typically, a fund will say it's unconstrained when the managers can go both long and short bonds and invest across the landscape of fixed income opportunities. The way each fund slices up those options can make a big difference on performance.

Goldman Sachs has a product in this space that has seen record inflows of $9.8bn in th......................